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Meet the Johnsons.
Stu and Annabelle have worked hard and saved all their lives,
and now they've got free time to enjoy their savings.
The Government of Canada wants to make retirement more
rewarding for the Johnsons- and for you.
The Johnsons have heard about pension income splitting.
What does this mean for them?
Stu is 65.
He worked his whole life at an insurance company and has saved
for retirement through RRSPs.
He is also receiving payments from a registered pension plan.
Annabelle is 59 and a substitute teacher.
She stayed home to raise their kids for about 15 years,
and her income is not as high as Stu's.
Splitting Stu's pension income means Stu can reallocate
some of his income to Annabelle's.
This reduces the amount Stu will be taxed on.
If Annabelle is taxed at a lower rate than Stu,
this can reduce the total amount of taxes that they'll pay
this year, and save the Johnsons money.
So how does it work?
Well, first, Annabelle and Stu need to be married
or in a common-law partnership at the end of 2013.
And they have to be residents of Canada at the end of the year.
Then, they have to have eligible pension income.
What's eligible?
Most pension and superannuation payments qualify,
so Stu's life annuity payments from his pension plan can be
split between him and Annabelle.
Annuity payments are fixed sums you receive annually
or periodically throughout the year.
Since Stu is over 65 at the end of the tax year,
annuity payments from his RRSP and most amounts from a
registered retirement income fund are also eligible.
If Stu was under 65, but was receiving them due to the death
of a former partner or spouse, these kinds of payments would
still be eligible.
However, certain amounts are not eligible for pension income
splitting, such as Old Age Security Payments,
Canada Pension Plan Payments or Quebec Pension Plan Payments.
The eligible amounts, added together,
make up the pension income that Stu and Annabelle can split.
What now?
Stu and Annabelle can work out how much of Stu's pension
income to allocate to Annabelle, up to 50%.
Some tax preparation programs can help them
work out the best amount.
Then, Stu and Annabelle fill out form T1032 together to indicate
that they will be splitting the pension income.
On the form, Stu will indicate how much he's deducting
from his pension income, and how much Annabelle will
be including in her income.
Both Stu and Annabelle must sign the form.
Then, if they are filing a paper income tax return,
they both submit the form with their tax return
by the tax filing date.
And voila!
The Johnsons may have saved some tax dollars.
What about you?
Want to be like the Johnsons?
Here is a link to help you.